We maintain OVERWEIGHT rating on the oil & gas sector with Brent oil price forecasts for 2024/2025 at USD85/80 per barrel, supported by (i) continued production cuts from OPEC at least until mid-2024, (ii) geopolitical uncertainties, (iii) anticipated diminishing supply growth from the US in 2024, and (iv) restocking drive of the US SPR. The ongoing global offshore capex drive as well as rising local upstream activities from Petronas are expected to underpin the performance of OGSE providers which are well-positioned to ride on the ongoing upstream capex upcycle. Top picks: (i) Armada (BUY; TP: RM0.71), Wasco (BUY; RM1.27) and Velesto (BUY; RM0.25).

Expecting a balanced market in 2024. EIA expects global crude oil production to grow by 1mbpd in 2024 to 102.6 mbpd, mainly driven by North America (+520kbpd) and Latin America (+200kbpd), while OPEC’s production is expected to shrink marginally (-120kbpd) in 2024. We believe EIA has not taken into account the recently announced additional voluntary production cuts of 0.7 mbpd by OPEC+ and thus, actual production could be slightly lower provided sufficient compliance by the cartel members. On the demand side, EIA anticipates the global oil consumption to grow by 1.4mbpd in 2024 (vs +1.9mbpd in 2023) to 102.4mbpd, mainly contributed by China (+380kbpd), India (+240kbpd), the US (+210kbpd) and the Middle East (+190kbpd).

Global offshore capex drive to benefit FPSO & rig owners. The ongoing investment cycle of FPSO projects is set to bolster the orderbook of FPSO players. With an estimated 50 new FPSOs awards by end of 2030, one of the key re-rating catalysts for FPSO players would be securing some of these jobs. Meanwhile, the global drilling market is also currently enjoying an upward cycle due to drilling rigs crunch as Middle East has been soaking up the JU rigs from other regions as its JU rigs demand rose more than 20% in 2023, leading to robust utilisation rate and DCRs. According to Evercore ISI, the demand for JU rigs in SEA is expected to increase to 38.4 units in 2024 and reach 39.2 units in 2025. Drilling rig count in SEA stood at only 37 units as at Nov-23, implying a deficit moving into 2024.

Petronas rising activities to support OGSE providers. Despite Petronas total 9M23 capex of RM34.3bn is lagging behind the average committed amount of RM60bn p.a, we believe Petronas will gradually increase its capex spending to sustain their domestic production as it is expected to peak in 2024. Due to substantial maintenance backlogs that need to be performed, Petronas is expected to award all five packages for Petronas Asset Integrity Backlog Clearance (ABC) by end-23/1Q24, amounting RM4-5bn where works will be carried out 2024-2026. Furthermore, we also anticipate Petronas to dish out the multi-year Pan Malaysia MCM-HUC packages (5-year firm, 3+2 option period) in mid-2024. These will continue benefitting the local OGSE players.

Petrochemicals: not out of the woods yet. Following a short-lived rebound in PE (i.e. HDPE/LDPE) prices in 3Q23, it is now again standing at its lowest levels since July. As Naphtha price will likely slide in tandem with falling Brent crude price, PE prices will probably remain under pressure as buyers push for further discounts. However, PE prices are likely nearing the bottom with limited scope for further drops, albeit meaningful recovery remains far-fetched at this juncture – as sellers are trying to hold prices despite weakening downstream demand.

We maintain OVERWEIGHT rating on the oil & gas sector with Brent oil price forecasts for 2024/2025 at USD85/80 per barrel, supported by (i) continued production cuts from OPEC at least until mid-2024, (ii) geopolitical uncertainties, (iii) diminishing supply growth from the US in 2024, and (iv) restocking drive of the US SPR. Top picks: (i) Armada (BUY; TP: RM0.71), Wasco (BUY; RM1.27) and Velesto (BUY; RM0.25).

Source: Hong Leong Investment Bank Research - 19 Jan 2024